from Renewing America

How to Fix the Trump Plan to Fix Our Infrastructure

A pothole is pictured on the street of Los Angeles, California (Mario Anzuoni/Reuters)

May 25, 2017

A pothole is pictured on the street of Los Angeles, California (Mario Anzuoni/Reuters)
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In an uncharacteristically low-profile manner, the Trump administration included a high-level preview of how it intends to tackle America’s infrastructure deficit in the 2018 budget request it submitted to Congress this week. The six-page fact sheet asks for $200 billion in infrastructure-related funding and lays out the administration’s primary goal: to seek and secure long-term changes in how projects are regulated, funded, delivered and maintained. Trump’s full-fledged infrastructure plan is expected later this year, but the preview should be lauded as much for what it aims to achieve as criticized for where it falls woefully short.

The preview of the infrastructure plan aims to be strategic. The United States lacks a multi-sector national strategy to prioritize and maximize use of scarce federal funds on infrastructure projects. The first principle in Trump’s preview would focus federal funds on high priority and transformative projects. To credibly determine what infrastructure projects are worthy of federal support, the administration will need to first undertake a comprehensive review of significant existing infrastructure assets on a national and regional level, then review current and proposed projects, and define a set of metrics to assess costs and benefits of investment. Metrics could include potential jobs impact, competitiveness, disaster resilience, public safety, public benefit, ability to leverage private capital, how close to “shovel ready” or other factors.  As a good example, in 2010 the United Kingdom addressed its own lack of strategy by developing an annual “National Infrastructure Delivery Plan” aimed at driving nationally significant infrastructure projects forward by unlocking private investment and measuring progress over time. From this strategic plan, the United Kingdom created a “National Infrastructure Pipeline” of priority projects.

A second item to be lauded in the Trump preview is its intention to “increase accountability and cut red tape, so that taxpayers get more bang for their buck for every dollar they invest in infrastructure.” This particular quote actually comes straight from the Clinton Campaign’s Infrastructure Plan, not Trump’s preview, but is consistent with Trump’s objective. Both sides of the aisle agree that the current permitting and approval process is inefficient and time consuming. The Trump administration has a head start here, since Congress already provided authority to streamline the federal permitting review process in its 2015 long-term surface transportation bill, the Fixing America’s Surface Transportation (FAST) Act, signed into law by President Obama. This leaves the challenge of implementation[1] largely in the hands of the Executive Branch. A word of serious caution is warranted however: given this administration’s seeming disdain for the environment, its stated aim in the preview to improve “environmental performance” and to “better protect and enhance the environment” as part of this regulatory overhaul could just be a plan to cut important safeguards.

A third principle to laud is the goal of increasing the role of the private sector and private finance in U.S. infrastructure investment, another objective consistent with both the Obama administration and the Clinton campaign. It would leverage federal dollars, and specifically highlights increased support for several good programs, including the Transportation Infrastructure Finance and Innovation Act (TIFIA), an existing financing program which supports Public Private Partnerships (PPPs), and innovative financing of transportation infrastructure with loans and credit enhancements. Trump's proposal also calls for expanded use of Private Activity Bonds (PABs), tax-exempt bonds issued on behalf of private entities constructing highway and freight facilities, and would fund the Water Infrastructure and Finance Innovation Act (WIFIA), the new water program based on TIFIA. These would be meaningful steps forward and would likely receive strong bipartisan support.

Where Trump’s proposal falls woefully short is that when it comes to investment, much of U.S. infrastructure requires, and will continue to require, robust public funding. The Trump budget proposal would significantly cut public infrastructure funding, and seems to support federal funds only so far as they provide leverage to private initiatives. Senate Minority Leader Charles Schumer (D-NY) estimates $206 billion of infrastructure cuts are in this budget proposal, more than the $200 billion Trump’s 2018 budget proposes to add. More private investment in infrastructure is necessary, but on its own it is not a silver bullet.  Private investors require commercially viable projects that generate revenue in order to invest, and not all infrastructure needs are consistent with generating commercial investment returns. Further, private infrastructure investment works better in high density urban areas where user-fees, tolls and other revenue-generating structures can be used to scale to provide an acceptable return on investment, while much of America's infrastructure needs reside in less concentrated (though politically important) rural communities.

Private investment in U.S. infrastructure remains so stubbornly low that over-reliance on private capital in the president’s proposal could easily disappoint.  Between 2007 and 2013 only two percent of overall capital investment in transportation projects came from private capital. The challenge is not the money - investors have significant capital to invest. Trump's team of bankers and businessmen may see the appeal of large sums of private capital looking for opportunities to invest in infrastructure, while at the same time see the country’s massive infrastructure investment needs; a seemingly perfect match. While superficially compelling, for now, the reality is the impediments to consummating that perfect match remain daunting and multi-faceted. There was no nod to these challenges in Trump’s preview of the infrastructure plan.

While the preview of the plan “encourages self-help” for state and local governments—code for “you are on your own”— there is no indication of how Trump’s private sector initiative will complement (or compete) with the municipal bond market. Roughly three-quarters of all infrastructure investment in the United States is financed at the state and local level and relies on inexpensive, tax-exempt municipal bond issuance.  This part of our existing system works.

Municipal finance is a challenge to the Trump private-sector only proposal because when state and local officials evaluate project costs, benefits and value to taxpayers compared to the higher costs of private capital alternatives and PPPs, they often rightly decide to pursue the traditional municipal bond option. In some cases, it makes more sense to share risk with private partners, potentially resulting in gains from better technology, “know how”, faster delivery, longer life-cycles and cost-effectiveness over time.  But these benefits often become apparent only over a longer time frame, and the value proposition for taxpayers is not always obvious.  Not only is it cheaper to stick with municipal bonds, it is often more politically resonant and defensible for states and local governments.

Missing entirely from Trump’s fact sheet is any reference to how it will solve America’s PPP “knowledge gap,” without which it will have trouble advancing any private sector-led plan. Some states are not geared up to utilize private capital at all, and others use a varied patchwork of legal and regulatory systems. While 37 states have some form of enabling legislation and regulatory framework to work with private capital, there is limited consistency between them, with wide disparities as to what types of PPPs can be undertaken.  Given the cross-state nature of many infrastructure projects, this presents an enormous impediment to private-sector participation, which relies on legal and regulatory certainty before putting capital to work.

Less obvious, but nonetheless challenging, is the knowledge gap at the state and local government level in evaluating costs and benefits of PPPs. Taxpayers can easily be exploited by private commercial interests if public officials lack the expertise and experience to protect the public interest.  Some states have created "PPP centers" to help guide officials through the process, but this is far from the norm.

The Obama administration sought to address this part of the knowledge gap by creating a federal PPP knowledge center, the Build America Bureau, to help provide resources and best practices to states interested in pursuing PPPs, as well as to help streamline access to federal grants and credits. This bureau will need to be supercharged to meet the Trump administration’s ambitions, and become more like P3 Canada, Canada’s PPP knowledge center, which helped drive Canada over the past eight years to become a leading destination for private investment in infrastructure.

A more amorphous hurdle is that the United States lacks a “culture” of private investment in many core infrastructure sectors.  Americans draw distinctions between core infrastructure they are comfortable with the private sector controlling and operating -- including electricity grids, telecommunications, pipelines and freight rail—and sectors where they are less comfortable with, and in some cases strongly opposed to, private investment or ownership—including water, airports, roads and bridges.  While not insurmountable (in the UK, for example the urban water supply and all three London airports are privately-owned and operated), changing public perception is a public education challenge and requires time and political effort. This is especially true if privatization becomes a central part of the Trump plan as it seeks “opportunities to appropriately divest from certain functions”.

President Trump needs to address where his proposal falls short so he can move a bipartisan effort to repair and replace our country’s creaking infrastructure.  Doing so would not simply help address the country’s estimated $4.6 trillion infrastructure deficit, but could represent a once-in-a-generation legacy that the president so clearly desires. Trump’s final infrastructure plan will not be credible without adding at least a commensurate amount of additional public infrastructure funding to match the $200 billion of funds intended to support the private-sector component. The private component will also need to solve for the knowledge gap in the United States.  There could be bipartisan support for a credible plan to deliver the infrastructure this country sorely needs. The question is will President Trump be able to take a serious stab at making his fact sheet into a plan that might actually work?

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Endnotes Up

  1. ^ A good review of what can already be implemented comes from the "Bipartisan Policy Center: How the Trump Administration Can Accelerate Permitting Now"